“Pretty much anything that’s good is going away,” sums up Bradford Carlson, director of tax at accounting firm Gray, Gray, & Gray, taking a doleful look at the tax-code changes that most likely will roll out in 2013, no matter how that little matter of the big Fiscal Cliff is ultimately resolved.
Accordingly, as 2012, the year of uncertainty, comes to a close, Carlson offers these tips for what small-business owners can do before the champagne corks pop to anticipate, or at least prepare for, all the good stuff that’s “going away” in 2013.
1. Invest now.
In 2012 the bonus depreciation allowed a business to take an immediate deduction for 50% of purchased or leased qualified assets, such as machinery and off-the-shelf software. In 2013 the bonus depreciation goes away. So if you bought a new trailer truck for $100,000 in 2012, you could deduct $50,000 of the cost. If you get it into service after December 31, 2012, sorry, no bonus-depreciation deduction.
In addition, for the past several years the increase in the Section 179 limits (which allow a 100% deduction as opposed to the 50% bonus) has allowed for the immediate expensing of qualifying personal property. For 2012 the deduction limit is $139,000. In 2013 the annual deduction limit is scheduled to be reduced to $25,000. Section 179 can be taken for used property, whereas the bonus depreciation has to be new. (Although some states do not follow Section 179 rules, many do.)
“Over the past few years, the depreciation has become so commonplace, and it’s been around for so long — since 2001 — that people just expect it to be there. Well, 2012 is the last year. So if you plan to acquire fixed assets, better do so before the end of 2012.”
2. Hire that vet now.
In 2011 the Returning Heroes Tax Credit and the Wounded Warriors Tax Credit were signed into law. Employers who hired veterans could receive tax credits for each veteran ranging from $2,400 up to a maximum of $9,600, depending on a variety of criteria. That’s going away.
“If you’re looking to hire a veteran, hire him in the next three weeks.”
3. Give that gift now.
This year the gift-tax exemption was $5.12 million. On January 1, 2013, it goes back to $1 million.
If you own an S corporation (in which the company’s earnings are taxed at the individual, not corporate level) worth $10 million and you want to give 20% to your kid (for example), a gift of $2 million, then do so now. If you wait until after the first of the year, anything over $1 million will be taxed at a gift rate as high as 55%.
“There’s talk of eliminating discounts of gifts entirely. The gift-tax exclusion is dropping, and the ability to take discounts may be eliminated in future worlds. So you should take a look at your succession planning, among other things, now.”
4. Pay those dividends now.
For 2013, qualified dividends will be taxed as ordinary income, which could increase the rate from 15% to as much as 43.4% (including the new 3.8% Medicare tax).
“C and S corporations with excess earnings and profits should consider making dividend payments before the end of 2012. Cash-poor corporations can also consider making either a cashless ‘deemed dividend’ [which reduces the tax obligation on shareholders upon the sale of the shares] by year-end for S corporations, or a ‘consent dividend’ [which is not actually paid but may decrease the corporate tax liability, thereby helping the share price] for C corporations.”
5. Accelerate revenue recognition now.
Currently taxed at 15%, the capital-gains rate is scheduled to increase to 20%, and may also be subject to the additional 3.8% Medicare tax.
Carlson’s take: “Taxpayers may want to accelerate the recognition of long-term capital gains into 2012 instead of deferring the gains to future years.”
Remember: This is the year of uncertainty. As Carlson says, “This could all be irrelevant. Congress could decide to extend all the [Bush] tax cuts for next year.”
Carlson’s final take? “No one knows what’s going to happen. What’s important is to only do what makes economic sense for your business. Don’t do anything driven by tax considerations. Don’t do something you wouldn’t normally do.”